Greece said that Europe’s wealthier countries are “playing with fire” by toying with the idea of expelling it from the 17-nation euro area as talks over a second aid program ran into new obstacles.

Finance Minister Evangelos Venizelos leveled the accusation after a decision slated for tonight on aid totaling 130 billion euros ($171 billion) was postponed until at least Feb. 20 and possibly until after a full-time Greek government emerges from elections later in the year.

“We are continually faced with new terms,” Venizelos told reporters in Athens today. “In the euro area, there are plenty who don’t want us anymore. There are some playing with fire, domestically and abroad. Some are playing with torches and some are playing with matches. But the risk is equally great.”

Two years after pledging to pull Greece back from the brink, European leaders are torn between pouring more aid into the struggling economy or risking an unprecedented national bankruptcy that might force the country out of the euro and prompt renewed market tumult.

I agree that the EU crew is playing with fire, and I have shown how badly said fire can burn over two years ago, yet ratings agencies and bank analysts still aren't sounding the alarm loud enough. As a matter of fact, even today, I doubt many understand that these REALLY are playing with F.I.R.E...

Even two years later after I have been proven right beyond a shadow of a doubt regarding the prospects of a Greek default, investors, analysts and pundits still do not seem to fully appreciate the gravity of the situation. If one peruses the BoomBustBlog archives, you will find the post What Country is Next in the Comingsa Pan-European Sovereign Debt Crisis? dated February 9th, 2010, and no I don't have a time machine...

Now, let's put this into perspective.

The amount of debt offered in the past will pail in quantity and scope with the amount of debt that needs to be offered now, amid historically record high deficits and dwindling revenues, high unemployment and global uncertainty.

Let's examine exactly how much debt we are talking about and when...image014.png

The weaker Eurozone countries will start flooding the market with sovereign debt rollovers starting THIS MONTH. It remains to be seen whether Germany will backstop Greece, but if they do how can they avoid backstopping Spain, Portugal and Italy. The Spanish and Italian backstops will be particularly tricky since there are bank NPAs hidden in their whose extent has been purposely kept a big mystery. Reference the NPA as a percetn of GDP chart above. If Germany doesn't backstop these countries then it's left up to the IMF and their goes the credibility of the Euro. If Germany does backstop the countries, then their goes those Bund rates! An interesting conundrum, indeed.

Yes, there are massive amounts of debt coming on to the market, and if Greece defaults, there is no way contagion can be prevented from spreading to Spain, Italy and Portugal, then to France. Why not? Because these countries have essentially the same problem that Greece has, and that is massive amounts of highly leveraged capital that has been destroyed, leaving debt service in its wake supported by weak and weakening economies - All made worse by austerity measures which are anti-stimulative, the actual antithesis of economic stimulative measures which will be the only thing that will stimulate said economies. As the excerpt above mentions, "The Spanish and Italian backstops will be particularly tricky since there are bank NPAs hidden in their whose extent has been purposely kept a big mystery." Here are some links and charts to clue you in on said mystery....

There are broad indications hinting that Italy and Greece are not the only countries that have used SWAP agreements to manipulate its budget and deficit figures. France and Portugal may be two other European economies which have resorted to similar manipulations in the past in order to qualify as part of single currency member nations (Euro Zone). Below is a small subset of the research that I have been gathering as I construct a global sovereign default model. This model is very comprehensive and thus far has indicated that quite a few (as in more than two or three) nations of significance have an 90% probability of defaulting on their debt in the near to medium term. More on this later, now let's dig into what we have found that looks like grossmanipulation of the numbers in order to hide debt in several European countries. Here's a quick quiz. What well known (in name only) Italian American has a significant chunk of the European Union Sovereign nations apparently modeled their financial engineering from?

Charles Ponzi (March 3, 1882 - January 18, 1949) was an Italianswindler, who is considered one of the greatest swindlers in American history. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo.The term "Ponzi scheme"....

... We have finished our review of the Italian "Austerity" plans to whip its debt load into shape. As with Greece (see "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!), we have found it wanting. Believe it or not, the biggest issue is the credibility of the government. They stretch the facts, assumptions and gray areas to the point where you tend to doubt everything else. It is almost as if they believe no one will actually read what they have written, which very well may have been partially true in the past. Alas, that was the past and this is the present. Information, and to a lesser extent, knowledge travels through the web at the speed of atomic particles. On that note, I release to my subscribers the Italy public finances projection 2010-03-22 10:47:41 588.19 Kb.

For those that don't subscribe, I would like to make clear that my assertions of flagrant and unsubstantiated optimism on the part of European governments stem from how quicly they feel their economies will grow despite the fact that they failed to see this maelstrom coming in the first place.

This is Italy's presumption of economic growth used in their fiscal projections:

italian_real_gdp_growth.png

Hey, there's more where that came from..

image042.png

So, you ask, "What in the hell does this have to do with the French?" Well, as I stated in my previous analysis of the big French banks, the French are heavily levered into Italy. How goes Italy, so goes many of the big French banks. Reference:

So, does BNP have a funding problem, or is it at risk of the same?

BoomBustBlog subscribers know full well the answer to this question. I'm also going to be unusually generous this morning being that our prime French bank run candidate has approached my "crisis" scenario valuation band. So, as to answer the question as to BNP, let's reference Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers, and otherwise known as BNP Paribas, First Thoughts...

The WSJ article excerpted above quotes BNP management as saying: "The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks."

OK, I'll bite. Excactly how did BNP get to this €135 billion figure? Was it by using Lehman math? Methinks so, as clearly delineated in my resarch report on the very first page:

BNP_Paribus_First_Thoughts_4_Page_01

The following two pages of this report go on to reveal the games being played to potentially come up with a figure such as the 135 billion quoted above. Boys and girls, I fear those may be Lehman bucks!

So, let's assume that the Italians can be infected by the Greeks, and then can in turn infect the French. France has not pulled the finnacial engineering gimmicks that Greece did, so they shoul be able to whether storm after bailing out their top 3 overleveraged global banks with asset bases that are multiples of France's GDP, right???

You're probably saying to yourself, "Wow, those guys over in Europe are Fuc2ed. Yeah, well basically... But no need to worry, because Germany, the next export nation who's major export/trading partners are either going into recession, depression, economic hard landing or have struggling economies and whose mortgage banking sector is about to have its ass handed to it is about to save the day by rescuing all of these profligate nations by flushing the all with cash, so it can continue trading with them. You see, you silly pessimistic speculator you... It all over and everything is find.

Hey, on that note I can probably run for POTUS now, eh? Except for one thing...

Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal and said it may strip France and the U.K. of their top Aaa ratings, citing Europe’s debt crisis.

Reference the subscriber document posted TWO years ago on the UK: UK Public Finances March 2010. For the more stingy amongst you who don't subscribe, reference the first three pages of said 710 day old document, then let me know if the rating agencies are showing up to pile of smoldering ashes with a fire hose again....

Continuing my predictive analysis of a global real estate relapse, I bring you today's headlines followed by updated research of company that we see slated for probable bankruptcy. Professional and institutional subscribers should download the latest deliverable, which illustrates the likelihood of a bankruptcy in our most recent forensic analysis candidate if it were to go the foreclosure route -Foreclosure Scenario Analysis. This is the professional addendum to the general subscriber analysis released in the post I Present To You The First Probable US Commercial Real Estate Insolvency Of Many To Come. The next deliverable will outline distressed sales of properties, and after that I will make available valuation models on 27 properties in the company's portfolio to inequivocably demonstrate that this company has nowhere to go but down. Ain't math something else? Now on to the news of (yester)day, as reported by Bloomberg.

thumb_Reggie_Middleton_on_Street_Signs_FireReggie Middleton Sets CNBC on F.I.R.E.!!! - Reggie Middleton preaching the travails of commercial real estate in 2012/13 on CNBCBank of America Plaza, the tallest tower in the U.S. Southeast, was sold at a public auction today on the steps of the Fulton County Courthouse after landlord BentleyForbes missed mortgage payments.

The noteholder had a winning bid of $235 million, according to attorney Howard Walker of McGuire Woods LLP, who ran the auction. Holders of commercial mortgage bonds took ownership through a “credit bid” placed by LNR Partners, David Levin said in an e-mailed statement. Levin is vice chairman of Miami Beach, Florida-based LNR Property LLC, the parent company of LNR Partners, the tower’s special servicer.

BentleyForbes, based in Los Angeles, paid $436 million to acquire the 55-story Atlanta skyscraper in 2006 from Bank of America Corp. (BAC) and Cousins Properties Inc. (CUZ) in the city’s biggest property deal. Since the property market peaked a year after the purchase, the 1.25 million-square-foot (116,000-square-meter) building’s value has tumbled with tenants, including namesake Bank of America, reducing space.

Atlanta has the highest rate of late payments for loans on offices bundled into bonds among the largest U.S. metropolitan areas, at 25.3 percent, according to data compiled by Bloomberg. That’s an increase from 10.4 percent a year ago and is more than triple the 7 percent national rate.

The $363 million Bank of America Plaza loan became delinquent in December after BentleyForbes stopped making payments. The loan was partly packaged inside JPMCC 2006-LDP9, which was downgraded by Fitch Ratings in December because of expected losses.

As I've been warning in many of my previous posts, ie. (must reads if you have not already done so):

The can kicking of the last 3 years will come to a head once those 5 year debt instruments issued in 2007 come due in 2012 and 2013. Do banks roll over what is an obviously losing proposition or do they take the money and run. Here is an excerpt of the professional/institutional subscriber document Foreclosure Scenario Analysis showing what happens when you get to the end of the road in the neighborhood Can-Kick! Click to enlarge...

thumb_REIT_bankruptcy_candidate_copy

We have culled the portfolio of nearly 30 properties which we individually valued and found who was due for mortgage/loan maturity in the next year. It didn't look pretty...

REIT_bankruptcy_candidate1

Of course, this is not just an "American" thing. The CRE crush will be felt word-wide, particularly in the EU, UK, and China.

What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overseas, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has littel effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks fail to roll over all of that underwater Eu mortgage debt?

Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression! These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly "OVERBANKED" (a term that I have coined).

So as to quiet those pundits who feel I am being sensationalist, let's take this step by step....

I strongly suggest those interested in this topic to peruse the whole article for it explicitly warns of what is about to happen any minute now, but first lets see what's popping in world news today, as Bloomberg reports the IMF, EU May Need to Give E. Europe More Help:

The International Monetary Fund and other lenders, who spent $42 billion to stem an eastern European banking crisis after 2009, may be forced to commit more aid to the region to cushion the effects of banks cutting assets. The IMF, the European Bank for Reconstruction and Development, the World Bank and the European Investment Bank should “stand ready to provide external assistance and financial support to banks” in eastern Europe, the Vienna Initiative group of regulators and policy makers said in a statement after a meeting in the Austrian capital yesterday. “There is a very strong impact of this -- a potentially strong impact,” Erik Berglof, the EBRD’s chief economist, said in an interview today in Vienna. “You have the headquarters making decisions on assets that are very small when you look at the total balance sheet, but when you look at the subsidiaries in eastern Europe they are systemic in the countries where they operate.”

Regulators and policy makers are trying to shield economic growth in eastern Europe as western lenders must meet higher capital requirements to withstand the euro area’s deepening debt crisis.

This makes very little sense since the bulk of growth in the CEE states stems from trade with the EU. If the EU catches a cold, the CEE states contract chronic pneumonia!

The Vienna group urged western European regulators and policy makers to work together to recapitalize banks and consider the effects on subsidiaries in other countries. Financial regulators need to step up coordination to reduce the risk of “disorderly deleveraging”...

Otherwise known as reality, a properly functioning market and transparent price discovery!!!

... in eastern Europe, Serbian central bank Vice Governor Bojan Markovic said at a Euromoney conference in Vienna today. By the end of June, European banks must have core capital reserves of 9 percent after writing down their holdings of sovereign debt, European Union leaders decided in October. That may require an additional 106 billion euros ($149 billion) of capital, a according to the European Banking Authority.

The 9 percent requirement “is not a very fortunate” plan given the current economic environment, European Central Bank Governing Council member Ewald Nowotny said at a Vienna conference today. “Regulatory requirements shouldn’t have a restrictive impact on the real economy,” Nowotny said.

Heh, let a banker tell the story and look what comes out! Appropriate regulatory requirements will have a restrictive impact on the economy if the prebious regulations were lax enough to allow abusive practives to juice the economy to unsustainable heights!!!

Deleveraging shouldn’t take place in countries that are growing and making structural changes to their economies, Albanian central bank Governor Ardian Fullani said today at the same conference.

Really? Suppose they aren't growing at the same rate that debt service emanating from piled derivative experiments are growing, and the structural changes being made are inadequate or fail to address the pertinent issues? I'm just saying...

The message to foreign banks is “don’t put everyone in the same pot,” Fullani said. “Give stimulus to the right countries.”

Hey, that's novel and new! I've never heard the cry for stimulus before... Like a junkie creeping for another hit...

Banks may reduce funding by as much as 30 billion euros this year, according to estimates by Raiffeisen, board member Patrick Butler said at the Vienna conference. “Compare that to the growth that we saw in 2006 or 2007 of 200 billion euros a year -- it’s minimal,” Butler said. “It is not a credit crunch.”

...“It is important that home country authorities internalize the cross-border effects on EU and non-EU countries in formulating their measures,” the Vienna Initiative said in its statement. “In particular, the recapitalization plans of international banks submitted to the EBA should be scrutinized” for their “systemic impact on host economies.”

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

foreign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

I. Summary of the methodology

We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.

In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors - a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.

Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.

The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

This is the 3rd installment of my controversial rant against the American education system - this time in video. If you haven't been following me, it is recommended that you read through the first two (admittedly lengthy, yet well worth the time) posts:

From this point on, start this YouTube video and let it play in the background as you go through the balance of this post. It''ll help set the mood...

So, the day following the CNBC appearance warning of the risks to the FIRE sector, and specific risks to the insurance industry in the guise of combined ratios bumping heads with massive investment losses on sovereign and financial entity debt, guess what appears in the headlines of those very same media outlets??? Insurers’ 2011 Catastrophe Losses Hit Record:

Japan’s earthquake and U.S. storms helped make 2011 the costliest year on record for insurance companies in terms of natural-disaster losses, according to Munich Re (ARN).

Several “devastating” earthquakes and a large number of weather-related catastrophes cost insurers $105 billion, more than double the natural-disaster figure for 2010 and exceeding the 2005 record of $101 billion, the world’s biggest reinsurer said in an e-mailed statement today. Competitor Swiss Re earlier estimated that the industry’s claims from natural catastrophes reached $103 billion.

Global economic losses jumped to $380 billion last year, surpassing the previous record of $220 billion in 2005, with the quakes in New Zealand in February and Japan in March accounting for almost two-thirds of the losses, Munich Re said.

“We had to contend with events with return periods of once every 1,000 years or even higher at the locations concerned,” Torsten Jeworrek, Munich Re’s board member responsible for global reinsurance, said in the statement. “We are prepared for such extreme situations.”

In Beware Even Those "Safe" Insurer's Portfolios I illustrated to my susbscribers the risks that insurance investors face. Munich Re said 2011 was the costliest year on record, but they failed to state how difficult it would be to handle said record losses with additional and potentially greater losses on bond and FI porfolios. Munich Re's net exposure to sovereign debt of PIIGS as % of tangible equity at the end of 2009 = 41.2%. Damn! Many compmanies are worse than that (and I'll delve into those a little later). Now, by revisiting the insurance primer that I offered in You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! you can see that combined ratios may very well break 100 while investment losses spike. Somebody may not get their claims funded, eh?

I discuss how Greece became over indebted through banks imprudently making bad loans, and more importantly why practically no one in all of Wall Street warned of the sovereign debt crisis besides BoomBustBlog. This is hard hitting opinion that is too controversial to publish anywhere else.

As explained in the second half of the video above, many still fail to understand the typical Wall Street bank business model, and more importantly fail actually audit the performance of said banks advice, recommendation and trading. I have laid it bare in BoomBustBlog many a time, which is probably the reason why my blog is banned from more than half of the big bank intranets!!! If you need an explicit example of what I a talking about, simply reference "Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!"

searsIn January of 2009 (nearly three years ago, which is ironic), I went bearish on Sears due to a variety of reasons, the least of which was less than competent management (hedge fund managers don't necessarily make good department store managers), macro conditions and fundamentals sloped towards hell. Although this was initially a very profitable trade, the rip roaring bear market rally of 2009 shredded the short profits - turning them into losses if uncovered, and simutaneously disguised the many issues that we brought up in our initiail short analysis. Well, you can run but you can't hide, and the truth will ultimately rear its head. On that note...

Sears Holdingsplans to close between 100 and 120 Sears and Kmart stores after poor sales during the holidays, the most crucial time of year for retailers.

In an internal memo Tuesday to employees, CEO and President Lou D'Ambrosio said that the retailer had not "generated the results we were seeking during the holiday."The closings are the latest and most visible in a long series of moves to try to fix a retailer that has struggled with falling sales and shabby stores.

Sears Holdings Corp. said it has yet to determine which stores will close but said it will post on the list online when it's compiled. Sears would not discuss how many, if any, jobs would be cut.

The news sent shares of Sears [SHLD 36.50 -9.35 (-20.39%) ] to their lowest point in more than three years, and it was posting the biggest percentage decline in the S&P 500 Index.

The full forensic analysis of the insurance short candidate as well as several US REITs that we are investigating will be released within 24 hours. For those who are not familiar with me, please visit "Who Is Reggie Middleton?"

The latest Reggie Middleton comments, opinion and analysis on this topic...

As a matter of fact, it actually appears that those few members of S&P that do read my blog have actually found some influence in the company. If you remember, last week I challenged the rating agencies with this taunting post -Where Are The Ratings Agencies Before UK& German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? Now, it's not as if the agencies have went so far as to actually take heed to my warning, but those who follow me know that I have been leading my subscribers through an explicit path of "contagion to come" for two years now. Who is the major conduit of said contagion? Well, the very same nation who is the 50% of the bilateral lynchpin of the EFSF. See:

Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade.

The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks.

“Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement.

Back in April of 2011, I told a curious audience of several hundred bankers and institutional investors in Amsterdam exactly how this will turn out. Thus far, I'v been right on point, as has the predictions dating as far back as 2009 in the Pan-European sovereign debt crisis series.

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations